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Exercise 5A-5: Solutions (10/27)

The document contains two summaries: 1. The first summary provides income statement information using variable costing for a company that sold 35,000 units. It shows revenue of $875,000, variable costs of $490,000, contribution margin of $385,000, fixed costs of $370,000, and net operating income of $15,000. 2. The second summary explains that the difference between variable costing and absorption costing net operating income is due to fixed manufacturing overhead deferred in inventory. It shows variable costing net operating income of $15,000 and absorption costing net operating income of $35,000 once fixed overhead deferred of $20,000 is added back.

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37 views

Exercise 5A-5: Solutions (10/27)

The document contains two summaries: 1. The first summary provides income statement information using variable costing for a company that sold 35,000 units. It shows revenue of $875,000, variable costs of $490,000, contribution margin of $385,000, fixed costs of $370,000, and net operating income of $15,000. 2. The second summary explains that the difference between variable costing and absorption costing net operating income is due to fixed manufacturing overhead deferred in inventory. It shows variable costing net operating income of $15,000 and absorption costing net operating income of $35,000 once fixed overhead deferred of $20,000 is added back.

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ppaulyni33
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Solutions (10/27)

Exercise 5A-5
1. Sales (35,000 units $25 per unit)...............................................
Variable expenses:
Variable cost of goods sold
(35,000 units $12 per unit*)...............................................
Variable selling and administrative expenses
(35,000 units $2 per unit)...................................................
Contribution margin......................................................................
Fixed expenses:
Fixed manufacturing overhead..................................................
Fixed selling and administrative expenses................................
Net operating income....................................................................
* Direct materials.....................................................
Direct labor...........................................................
Variable manufacturing overhead..........................
Total variable manufacturing cost.........................

$875,000
$420,000
70,000
160,000
210,000

490,000
385,000
370,000
$ 15,000

$5
6
1
$12

2. The difference in net operating income can be explained by the $20,000 in fixed manufacturing
overhead deferred in inventory under the absorption costing method:
Variable costing net operating income.........................................................
Add fixed manufacturing overhead cost deferred in inventory under
absorption costing (5,000 units $4 per unit in fixed manufacturing
cost)...........................................................................................................
Absorption costing net operating income.....................................................

$15,000
20,000
$35,000

Problem 5A-8
1. The unit product cost under variable costing is computed as follows:
Direct materials.................................................
Direct labor........................................................
Variable manufacturing overhead......................
Variable costing unit product cost......................

$4
7
1
$12

With this figure, the variable costing income statements can be prepared:
Year 1
Unit sales...................................................................................
40,000 units
Sales...........................................................................................
Variable expenses:
Variable cost of goods sold
(@ $12 per unit).................................................................
Variable selling and administrative expenses (@ $2 per unit)
Total variable expenses..............................................................
Contribution margin...................................................................
Fixed expenses:
Fixed manufacturing overhead...............................................
Fixed selling and administrative expenses.............................
Total fixed expenses...................................................................
Net operating income.................................................................

Year 2
50,000 units

$1,000,000

$1,250,000

480,000
80,000
560,000
440,000

600,000
100,000
700,000
550,000

270,000
130,000
400,000
$ 40,000

270,000
130,000
400,000
$ 150,000

2. The reconciliation of absorption and variable costing follows:


Variable costing net operating income.......................................
Add (deduct) fixed manufacturing overhead deferred in
(released from) inventory under absorption costing (5,000
units $6 per unit in Year 1; 5,000 units $6 per unit in
Year 2)...................................................................................
Absorption costing net operating income...................................

Year 1
$40,000

30,000
$70,000

Year 2
$150,000

(30,000)
$120,000

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